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This article was contributed by Steve Sildon at CreditCardAssist.com. Steve writes frequently about credit cards, providing advice, tips and expertise on a variety of personal finance and credit-related topics as well.

Given the recent swoon in our economy, the credit worthiness of thousands of consumers has been left in shambles with rapidly declining home values, job losses and bad mortgages on top of it all. For years, the credit markets have been overly generous with consumers and now these bad lending practices are coming home to roost.

Card issuers have been forced to adapt to the recent changes in the credit markets and have tightened their lending and credit approval criteria significantly since late 2007. Card issuers have cut credit limits substantially for scores of consumers and have even started closing accounts en masse due to account “inactivity”. Many consumers that have relied on their credit cards in the past are suffering heavily from the fallout.

With so many credit card accounts being closed and credit limits being slashed so suddenly, many consumers have been left wondering how these credit decisions are being made. Who decides who gets credit? How do they decide how much credit to extend? Is it based solely on my FICO score? What factors are taken into consideration when making these credit line decisions?

For starters, there are 2 separate classifications for credit line decisions: traditional and non-traditional factors. Traditional factors in credit decisions, typically considered first in the decision-making process, are things such as credit card payment history, credit bureau data (FICO scores) as well as reported income, among others.

What most people are unaware of is that there are several “non-traditional” factors that weigh heavily in the decision making process as well. One non-traditional factor in particular that is considered is the type of mortgage that the cardholder has and, in particular, whether the loan is subprime or prime. A subprime mortgage, suitable for borrowers with less than ideal credit, might indicate to a card issuer that the cardholder is much more of a default risk on a credit card balance than a prime mortgage holder would be. Card issuers have always factored in the mortgage type of the cardholder as one consideration in the process, with the housing market in such a perilous state though, card issuers are weighing it much heavier in lending and credit limit decisions than they have in the past.

Another non-traditional factor taken into consideration is the geographic location of the customer. Location has always been a factor that’s been considered as well, taking into account where you live as a factor in your credit risk. But nowadays, geography has a heavy influence on decisions about credit worthiness. Cities, towns and entire geographical areas that have experienced job losses or heavy unemployment represent a significant threat to lenders who fear the impact of unemployment and its effect on the ability of cardholders to repay their debts. Banks and lenders are keenly interested in knowing about the threat of unemployment in any geographic area. Even those cardholders with steady, long-term employment and no legitimate threat of job loss have been hampered trying to get credit specifically because of their geographic location.

As of late, spending patterns of cardholders are another non-traditional factor that’s being heavily considered as well. People who begin to show a sudden change or an atypical pattern of spending represent a huge red flag for card issuers and lenders. Charging “necessity” items such as insurance premiums, electric bills or grocery items signals the issuer that the cardholder is starting to have financial problems. Things like sudden cash advances being taken out, small payments being made or card balances rolling over from month to month instead of being paid down as usual, all represent atypical spending behavior and sudden changes in spending patterns that can red flag your account and indicate that you could be in trouble financially.

So what can you do about all of this to protect your credit-worthiness? For those of you who’d like to protect your ability to get credit, there are a few things that you can do, or not do for that matter. One of the best things that you can do is to keep your spending patterns status quo. Don’t suddenly change your spending behavior by taking out cash advances or start revolving balances when you’ve always paid them down in full in the past. Any sudden changes might indicate cash-flow or financial issues that might scare your card issuer into changing the terms in your agreement, reducing your credit limits and/or even increasing the interest that you’re paying on that 0% balance transfer that you made months ago!

The best advice about protecting your credit worthiness in times like these is simply this: make sure that you keep making your payments on time, and above all, keep those card balances low.

Easier said than done? Yes, but if you can simply follow that advice and stick to it, you should never have any problems getting credit now and keeping it in the future.

pic by: Andres Rueda

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  • Filed under: credit cards
  • This post over at Frugal Dad about the fact that credit cards are nothing more than loans reminded me of a certain type of phone call I used to get when I worked in credit card customer service.

    The bank I worked at wouldn’t allow online gambling with their credit cards.  This would irritate people to no end.  The customer’s argument was always that we can’t tell them what they can do with their money.  I would have to explain that in fact it was not their money.  It was the bank’s money.  And the bank didn’t want to loan them money so they could gamble.  If they wanted to use their money then they would have to use their debit card.

    Weird that no one ever took me up on that offer.

    There was another call I got once from a woman who wanted to know why her credit card was declined.  She had a $500 credit limit and a balance of $490.  I explained that she didn’t have enough available credit to make her purchase.  She didn’t understand that because she had just made a $10 payment.   We went back and forth a few times.  Turns out that she thought she got a brand new $500 limit every month as long as she made her minimum payment.  I explained this was not the case, that a $500 limit means she can borrow up to $500 at a time.  Forever.  Not every month.  She said “Well, this isn’t a credit card… it’s a debit card.” and hung up.

    Can you imagine if you got a fresh credit limit every month?  Wow.  We think we are in a mess now!

    Check out this post here for more customer service adventures.

    pic by: The consumerist

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  • Filed under: credit cards
  • Credit cards can be nasty beasts. Whether you are getting out of debt or using them for their convenience, security, or reward points it’s important to know each card’s exact attributes. Here is a list of 8 things you must know about your credit card.

    1. Balance I put this one as number one because, in my opinion, it’s the most important. You simply must know how much you owe. Whether you pay your balance in full or are digging yourself out of a hole. Everything starts with the balance

    2. Credit limit You want to make sure you keep your balance under the credit limit. You can’t do that if you don’t now exactly where your limit lies. If your account is over limit the fees will pile up faster than you can say “debt sucks”. Pay down an over limit card as fast as possible, regardless of the interest rate.

    3. Interest rates Notice I said rates, with an S. You have more than just the interest rate on your purchases. You might also have a balance transfer rate or a cash rate. Know what each rate is and the balance in each category.

    4. Cycle date The cycle date is the date your statement prints. It’s where one statement ends and the next one begins. It’s important to know because most cards calculate the interest based on the average daily balance. This means the earlier you make your payment the lower your average daily balance will be.

    5. Due date Obviously you need to know this. It’s the last day you can make your payment and avoid a late fee. You must make your payment sometime between the cycle date and the due date.

    6. Default rate and what can trigger it The default rate is a terrible thing. Being late or over limit too much can cause your interest rate to skyrocket. You will probably have to call customer service to find out exactly what triggers the default rate. The terms and conditions will be vague about this point. Take the time to make sure you know what not to do. You will want to avoid those actions at all costs.

    7. Payment allocation Remember how different types of balances have different interest rates. Well, when you make a payment the credit card company most likely will pay the balance with the lowest interest rate first. Find out if this is the case, if so ask if there is a way to send a special payment to the balance with the highest interest rate instead. Some companies allow this and some don’t. You will still have to make the minimum payment the regular way, then you can send extra to your specified balance.

    8. Know your rewards Are you earning rewards with your card? If you can earn rewards you might as well. Find out what type of rewards you can earn and how to maximize them. Do you earn 5% cash back on gas on one card and 3% on groceries on another. Then use them accordingly. Max out those rewards where you can. But only if you can pay the balances in full and are organized enough to keep track of those due dates.

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  • Filed under: credit cards
  • Tricky credit card offers

    I almost made a big mistake because of some small print. I am currently in the market for a credit card with a zero percent interest rate for at least a year with no balance transfer fee. When we landscaped the back yard last year we put it on a card that was zero percent until the end of October. Since that is coming to an end soon I’m looking to move it.

    Last night I got an offer that said “0% fixed APR on purchases until January 1, 2010 when you transfer a balance now!” Sweet! January 2010 is perfect, and it also said that there was no balance transfer fee if the balance transfer was done within 30 days of opening the card. I was going to apply for this card and move my $7,800 balance over.

    Then this morning I was trying to figure out if I had to do the balance transfer with the application, or if I could wait to be approved and then move it over. But while I was reading I noticed that the 0% is only on purchases and is not the balance transfer at all. The balance transfer would be at 8.99% right from the start. Ouch, not what I’m looking for at all.

    The big bold print on the front of the offer seemed so great but you really have to make sure you know what you’re getting into when you deal with credit cards. They have some very “creative” offers. If you’re not 100% comfortable with how to read a credit card offer I wrote a post a few months ago for Jonathan over at Master Your Card that gives a section by section explanation.

    pic by: KM

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  • Filed under: credit cards
  • Cash Back Credit Cards

    Well, I’ve finally entered the world of cash back credit cards. I’ve always thought they were a good idea, but they never seemed like they were worth the hassle. An extra card to carry around, another bill to pay, something else to organize and keep track of, I don’t know… I just never felt the need, but I was glad they worked for other people.

    Then I was getting gas a few weeks ago and I’m just standing there watching our hard earned money go down the drain and there was an ad on the pump for the Costco American Express Business card, which gives 5% cash back on gas. I stood there thinking, “Gee if I had that I would be getting like $3 off just this purchase.” So I grabbed an application. It’s a business card, so I used my Ebay business as my business. Sure I only make about $10 a month, but they don’t ask for a Profit and Loss Statement, you know what I’m sayin’?

    I just got my card yesterday and I’m very excited. We budget with a envelope type system in Excel. So we figured out a way to keep track of which category we spent the money from and still keep track of what we have spent on the card. I think it should work out.

    As well on 5% cash back on gas, this card also gives back 3% at restaurants, 2% on travel, and 1% on everything else. I figure we should earn about $354 a year just on gas and eating out. So I think it’s worth giving it a shot.

    Related Posts:

    Credit Protection

    How to have your late fee reversed

    Pic by: ingriogiro

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  • Filed under: credit cards
  • Credit Protection

    I got my credit card statement the other day and I saw something that made me really mad at myself. No, I didn’t overspend; I realized for the first time that I have their “credit insurance”. It’s called different things with different credit cards but the idea is the same with each. They charge you a small percentage of your balance and say they will pay your minimum payment if you are laid off or become disabled. They will also pay off your entire balance if you die. You are usually signed up automatically when you open a new account. I can’t say it’s a scam exactly but I’m here to tell you it’s pretty hard to actually qualify for the benefits. If you have this on your credit card call and cancel it right away. This service costs about 80 cents for every $1,000 of balance. So for an $8,000 balance you would pay about $6.40.

    I’ve mentioned before that I used to work in credit card customer service. I talked to over 100 people a day for two years about their credit card accounts. That means I’ve worked on over 50,000 credit card accounts. Do you know how many people I’ve seen that actually received benefits from the “credit protection”? One. ONE! One person out of 50,000. I’ve worked with dozens of people while they were trying to receive benefits and were eventually denied. I’ve seen lots of accounts go into collections because the cardholder was told they would receive benefits but then never did. But I’ve only seen one person actually receive benefits from this insurance.

    Still not convinced? Let’s take a look at the supposed benefits.

    · They will make your payment if you are laid off or disabled. This is only for a certain amount of time, usually a year, and it’s only the minimum payment. The minimum payment on a balance of $8,000 is probably about $160. That is less than $2,000 in potential benefits. And your balance didn’t go down very much. At the end of the year you would still owe quite a bit. They didn’t really relieve you of anything.<!–[endif]–>

    · They will pay your entire balance if you die. Who cares? You’re dead. If there is another contractually liable person on the account then this benefit doesn’t kick in. If there was not another liable person then there isn’t anyone to collect the money from. No one needs to pay it.

    Ok, so hopefully I’ve convinced you that you don’t need this service. When you get your credit card statement this month, take a close look. Make sure you aren’t paying for this service. Credit card debt is hard enough to get out of without having extra charges put on your account every month.

    Pic by: Photo Alien

     

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  • Filed under: credit cards
  • If you make a charge on your credit card and there is a problem with the transaction you can file a dispute with the credit card company. You have 60 days from the posting date to file this dispute. There are several reasons under which you can file a credit card dispute. The most common ones are as follows:

    • Services not rendered.
    • Item not received.
    • Service canceled.
    • Item returned.
    • Duplicate charge.
    • Partial dispute. – you don’t have to dispute the whole charge if you had a problem with only part of your order.
    Steps in filing a dispute.

    • Call the merchant

    This is the first step in disputing a charge on your credit card. It’s the fastest and easiest way to handle a dispute. It is entirely possible that if you contact the merchant and explain the situation they will remove the charge. Besides, the credit card company won’t go to bat for you unless you have spoken to the merchant first.

    • Contact the credit card company.

    Let them know you want to dispute the charge. They will probably ask you some very basic questions and send you a form to fill out.

    • Fill out the form and mail it back.

    The form will ask the details of the charge. They will want to know when you spoke to the merchant and the results of the conversation. If you have a cancellation number from the merchant you will need to provide it on this form.

    • Wait.

    It can take 30 days for a resolution to the dispute. If you see a credit on your account before the 30-day mark do not assume everything is finished. Most likely, it is a temporary credit issued while the company investigates the charge. If the credit card company find in your favor the credit is yours to keep, if not the charge will reappear on your account. So leave room for it in your available credit. (You shouldn’t be charging right up to your limit anyways.) If you don’t receive a temporary credit, don’t worry. The charge will not accrue interest or be included in your minimum payment calculation while it is in dispute.

    If you liked this article, you may also enjoy: How to have your late fee reversed.

     

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